November saw the recovery continue from September’s lows as equity markets rallied after the US Federal Reserve Chairman indicated that the rate hikes could slow from December onwards. Domestically the RBA raised the cash rate by only 0.25% rather than the expected +0.5%, contributing to the view that the central bank tightening of interest rates is coming to an end. A positive move for interest-rate-sensitive stocks.
The Atlas High Income Property Fund gained +3.4%, with the share prices of many companies held in the Fund now recovered from the falls seen during the market panic in September. The falls in August and September were based on the assumption that property and infrastructure trusts could not increase revenues with inflation and all had short-term variable rate debt. While some companies structured their debt in this fashion before the GFC, few are in this precarious position in 2022!
The Fund is populated with Trusts that deliver stable earnings today, revenue that increases in line with inflation and debt hedged for an average of 5 years. As such, inflation and rising debt costs will less impact profits than markets fear. In December, a large number of companies held in the Fund will declare dividends which are expected to show the resilience of company earnings.
Go to Monthly Newsletters for a more detailed discussion of the listed property market and the fund’s strategy going into 2023
Medibank says that 480,000 customers had health claims data stolen that contained potentially embarrassing information. A similar damages award to this group of 480,000 would be larger than Medibank’s market cap. Precedent can be helpful when thinking about the potential effects of legal action.
The last three years have been eventful for bank shareholders, with each year bringing a new set of worries predicted to bring the banks to their knees. 2020 saw capital raisings from NAB and Westpac missing its first dividend since the banking crisis of 1893, as experts forecasted 30% declines in house prices and 12% unemployment!
Cap rates are a measure that helps evaluate real estate investment, and a higher cap rate results in a lower property value. So the higher the cap rate, the better it is for the investor. Each REIT uses its own cap rate to determine its valuation.
October saw a sharp rebound from the falls seen in September, based on the view that the central bank’s tightening of interest rates was nearing its peak. Over the month, many companies provided quarterly trading updates that showed solid leasing activity, robust tenant sales and minimal changes to vacancies. Besides improving macroeconomic sentiment, favourable trading updates saw investors buying property stocks.
The Atlas High Income Property Fund gained +9.6%, as several key holdings saw significant recoveries in their share prices. Arena REIT (+18%) rallied the Federal Budget provided for increased childcare subsidies and SCA Property (+15.7%) on the “new” view that food inflation and rising mortgage payments might be beneficial for supermarket landlords due to higher sales. These two companies were sold down heavily in September, despite reporting solid profits and a positive outlook for 2023.
The extreme market volatility over the past six months is very unusual and a result of a normalising of interest rates and, for many investors, their first experience with inflation. While exasperating, the Fund is populated with companies positioned to navigate changing market conditions with long-term fixed-rate debt and revenues tied to inflation.
Go to Monthly Newsletters for a more detailed discussion of the listed property market and the fund’s strategy going into 2023
